Saturday, February 11, 2017

WWE 2016 Results - Data

90 Minutes of Wrestlenomics Radio talking through the results!
Host Chris Harrington w/'s Brandon Howard.

WWE 2016 Results

Prediction is operating income of 70M / OIBDA of $100M for 2017


· 2016: $12.6M / = 858,310 Buys?
· 2015: $20.6M / = 1,403,000 buys = $14.68 ASP
· 2014: $45.2M / = 2,292,000 buys = $19.72 ASP
· 2013: $82.5M / $34.1M OIBDA (41%) = 3,858,000 buys = $21.38 ASP
· 2012: $83.6M / $46.0M Profit Contribution = 4,023,000 buys = $20.78 ASP
· 2011: $78.3M / $40.7M Profit Contribution = 3,842,100 buys = $20.38 ASP
· 2010: $70.2M / $39.8M Profit Contribution = 3,631,100 buys = $19.33 ASP

Another drop of $8m in PPV this year.

WWE Network
· 2016: $168.3m
· 2015: $138.8m
· 2014: $69.5m

Competition include subscription digital services from Amazon, CBS, ESPN, HBO, MLB, Hulu, Netflix, NFL Network, Nickelodeon, Showtime, YouTube and many others. WWE Network now has 4x hours (7,000 hours) compared to Feb 2014 launch.

Network Segment (PPV+VOD+WWE NETWORK)
· 2016: $180.9m / OIBDA: $43.0M (23.7% OIBDA) = 32.3% OIBDA if you exclude 15.4m cost
· 2015: $159.4m / OIBDA: $49.5M (31.0% OIBDA)
· 2014: $115.0m / OIBDA: -$1.8M (n/a OIBDA %)
· 2013: $86.3m / OIBDA: $27.9M (32.3% OIBDA)
· 2012: $87.7m / OIBDA: $41.3M (47.1% OIBDA)

Network segment took on $15.4m of “Certain shared costs and expenses between Network and TV segments” in 2016.

Television Rights
· 2016: 241.7m / OIBDA: 119.8m (49.5%) = 43% OIBDA if you include 15.4m cost
· 2015: 231.1m / OIBDA: 96.7m (41.8%)
· 2014: 176.6m / OIBDA: 61.9m (35.1%)
· 2013: 163.4m / OIBDA: 56.1m (34.3%)
· 2012: 140.9m / OIBDA: 51.6m (36.6%)
· 2011: 132.6m / OIBDA: 53.2m (40.1%)

We received $17.7 million in non-film related incentives associated with television production activities in 2016, as compared to $6.3 million in 2015. During the year ending December 31, 2017, we anticipate receiving approximately $5 million to $15 million on non-film related incentives.

During 2016, the Company spent $28.0 million to produce non-live event programming for television (Total Divas Season 6, Total Bellas and Total Divas Season 5, and various non-live event programs for WWE Network, including Holy Foley, Camp WWE and Swerved Season 2).

During 2015, the Company spent $36.2 million spent on comparable programming in 2015.

We anticipate spending approximately $10 million to $25 million to produce additional non-live event content during the year ending December 31, 2017.

Home Entertainment
 2016: 13.1 / OIBDA: 5.3m ( 40.4%)
2015: 13.4 / OIBDA: 4.6m ( 34.3%)
2014: 27.3 / OIBDA: 15.0m ( 54.9%)
2013: 24.3/ OIBDA: 8.8m ( 36.2%)
2012: 33.0 / OIBDA: 15.4m ( 46.7%)
2011: 30.4 / OIBDA: 13.7m (45.1%)

2016: released 24 new home video productions domestically and, in the U.S., shipped 1.6 million DVD and Blu-Ray units, including catalog titles released in prior years.
2015: released 28 new home video productions domestically and, in the U.S., shipped 2.1 million DVD and Blu-Ray units shipped in the U.S
Home Entertainment which include revenues generated from the sale of WWE produced content via home entertainment platforms such as DVD and Blu-Ray discs and digital downloads

Digital Media

2016: $26.9 / OIBDA: 4.6m (17%)
2015: $21.5 / OIBDA: 4.4m (20.4%)
2014: $18.2 / OIBDA w/ magazines: 0.3m [2.7 magazine publishing]
2013: $23.0 / OIBDA: 5.5m (23.9%) [5.7 magazine publishing]
2012: $19.7 / OIBDA: 8.2m (41.6%) [6.0 magazine publishing]
2011: $12.5 / OIBDA: 5.3m (42.4%) [7.7m magazine publishing]

The Company receives advertising revenues from YouTube and Facebook based on viewership of our content.
Previously the Company's pay-per-view webcasts via The role of social media by fans and by us is an increasingly important factor in our brand perception.

4.9m of the increase in 2016 Digital Media came from YouTube. Spend increase of 3.2m for increased staff related and professional services costs to support various technology initiatives.

Live Events (including travel packages)
· 2016: 141.4m / 280 dom events + 64 intl events / 189 NXT events OIBDA: 40.1m (28.4%)
· 2015: 122.4m / 273 dom events + 56 intl events / 120 NXT events OIBDA: 36.1m (29.5%)
· 2014: 108.5m / 264 dom events + 54 intl events / OIBDA 27.0m (24.9%)
· 2013: 111.5m / 256 dom events + 65 intl events / OIBDA 30.1m (27.0%)
· 2012:103.7m / 248 dom events + 66 intl events / OIBDA 26.4m (25.4%)
· 2011: 104.7m / 241 dom events + 80 intl events / OIBDA 26.7m (25.5%)

2016: 189 NXT events = 187,800 paid att. ($37.26 avg ticket) = 994/show ($37k) = $7.0m in revenue
2015: 120 NXT events = 92,500 paid att. ($36.71 avg ticket) = 771/show ($28k) = $3.4m in revenue

Venue Merchandise
 · 2016: 24.2m / 9.8m OIBDA (40.5%) = $70k/show
· 2015: 22.4m / 8.9m OIBDA (39.7%) = $68k/show
· 2014: 19.3m / 7.7m OIBDA (39.8%) = $61k/show
· 2013: 19.4m / 7.5m OIBDA (38.7%) =$59k/show
· 2012: 18.8m / 6.7m OIBDA (35.6%) = $60k/show
· 2011: 18.3m / 7.3m OIBDA (39.8%) = $57k/show

2016: 49.1m / 27.4m OIBDA (55.8%)
2015: 48.9m / 28.8m OIBDA (58.9%)
2014: 38.6m / 21.0m OIBDA (54.4%)
2013: 43.6m / 31.1m OIBDA (71.3%)
2012: 46.3m / 32.3m OIBDA (69.7%)
2011: 54.4m / 37.0m OIBDA (68.0%)

The OIBDA margin in the 2013 reflected a $2.0m benefit associated with the recognition of the advance received from THQ. Bankrupcy of THQ and transfer of video game license to Take-Two Interactive on 2014.

The decrease in Licensing OIBDA as a percentage of revenues in 2016 as compared to 2015 was primarily due to increased talent participation expenses driven by product mix.

2016: 34.6m / 771,500 orders ($45) / $7.3m OIBDA 21.0% OIBDA
2015: 27.1m / 590,000 orders ($46) / $5.1m OIBDA 18.9% OIBDA
2014: 20.2m / 426,000 orders ($47) / $3.5m OIBDA 17.3% OIBDA
2013: 15.5m / 320,000 orders ($48) / $2.4m OIBDA 15.5% OIBDA
2012: 14.8m / 307,000 orders ($48) / $2.1m OIBDA 14.2% OIBDA
2011: 15.6m / 330,000 orders ($47) / $1.8m OIBDA 11.5% OIBDA

Added Amazon UK for European customers in 2014
Orders increased primarily due to the impact of additional distribution channels, including in international territories, continued marketing efforts and a broader assortment of products offered. The increase in WWEShop OIBDA as a percentage of revenues in 2016 as compared to 2015 was due to leveraging our fixed costs and improved fulfillment processes.

· 2016: 10.1m / -0.2m OIBDA [includes 3.0m from 2015 films]
· 2015: 7.1m / -1.5m OIBDA [includes 2.5m from 2014 films]
· 2014: 10.9m / 0.5m OIBDA [includes 3.8m from The Call released in 2013]
· 2013: 10.8m / -12.7m OIBDA
· 2012: 7.9m / -5.5m OIBDA
· 2011: 20.9m / -29.4m OIBDA

WWE released five films in 2016 (four on DVD):
· Countdown
· Scooby Doo! & WWE: Curse of the Speed Demon
· Interrogation
· Eliminators
· Incarnate (theatrical)

We have substantial capitalized film costs.
During 2016, the Company spent $6.6 million on feature film production activities, compared to $3.8 million in 2015. In 2016, we received $1.0 million in incentives related to feature film productions, as compared to $2.4 million in 2015. We anticipate spending between $10 million and $35 million on feature film production during the year ending December 31, 2017.

During the years ended December 31, 2016, 2015 and 2014, we recorded aggregate impairment charges of $0.8 million, $0.5 million, and $1.5 million, respectively, related to several of our feature films.

As of December 31, 2016, we had $27.1 million (net of accumulated amortization and impairment charges) in capitalized film production costs, which includes 32 released films, six films completed but not yet released, three films in production, and one film in development. No assurance can be given that additional unfavorable changes to revenue and cost estimates will not occur, which, in turn, may result in additional impairment charges that might materially affect our results of operations and financial condition.

We currently record revenues from our licensed products and WWE Studios film distribution revenues after receiving statements from the licensee and/or film distributor. Under the new revenue recognition rules, revenues will be recorded based on best estimates available in the period of sales or usage.

Corporate & Other
· 2016: -178.7m OIBDA (4.2m Rev) = 24.5% of Revenue
· 2015: -172.1m OIBDA (3.2m Rev) = 26.1% of Revenue
· 2014: -151.4m OIBDA (3.0m Rev) = 27.9% of Revenue
· 2013: -127.3m OIBDA (2.9m Rev) = 25.1% of Revenue
· 2012: -116.4m OIBDA (2.3m Rev) = 24.0% of Revenue
· 2011: -103.4m OIBDA (2.4m Rev) = 21.4% of REvenue

Corporate and Other expenses increased by $14.7 million, or 9%, in 2016 as compared to 2015. This increase is primarily due to increases in professional fees of $4.7 million in support of company-wide strategic initiatives, staff related costs of $3.7 million due to increased headcount, talent related costs of $2.6 million in support of talent development and investments of $1.6 million in global branding.

International Breakout

Cultural norms and regulatory frameworks vary in the markets in which we operate and our products' nonconformance to local norms or applicable law, regulations or licensing requirements could interrupt our operations or affect our sales, viewership and success in the markets.

Approximately 185 Superstars under exclusive contracts.. highly trained and motivated independent contractors.
Our NXT division, which continues to grow in popularity, features developmental talent training to become WWE Superstars. NXT has produced approximately 90% of our current active main roster stars, such as Kevin Owens, Charlotte Flair, American Alpha, Alexa Bliss, and Sami Zayn. NXT has now evolved into our third brand after Raw and SmackDown and has transitioned into a global touring brand broadcasting live specials on WWE Network throughout the year. In 2016, we focused on recruiting international talent, resulting in approximately 40% of our developmental talent coming from outside the U.S., including China, Japan, Australia, Ireland, Scotland and Poland.

While we believe that we have a loyal fan base, the entertainment industry is highly competitive and subject to fluctuations in popularity, which are not easy to predict. For our live, television, WWE Network, pay-per-view and movie audiences, we face competition from professional and college sports, other live, filmed, televised and streamed entertainment, and other leisure activities. We compete with entertainment companies, professional and college sports leagues and other makers of branded apparel and merchandise.

The demand for entertainment and leisure activities tends to be highly sensitive to the level of consumers’ disposable income.

During the year ended December 31, 2016, we invested $1,000,000 in a fantasy sports content provider, $1,000,000 in a subscription-based sports media company and $250,000 in a virtual reality platform operator. During the year ended December 31, 2015, we invested $515,000 in a live event touring business and $400,000 in Series F Preferred Stock of a software application developer.


We could incur substantial liability in the event of accidents or injuries occurring during our physically demanding events.

We hold numerous live events each year. This schedule exposes our performers and our employees who are involved in the production of those events to the risk of travel and performance-related accidents, the consequences of which are not fully covered by insurance. The physical nature of our events exposes our performers to the risk of serious injury or death. Although our performers, as independent contractors, are responsible for maintaining their own health, disability and life insurance, we self-insure medical costs for our performers for injuries that they incur while performing. We also self-insure a substantial portion of any other liability that we could incur relating to such injuries. Liability to us resulting from any death or serious injury sustained by one of our performers while performing, to the extent not covered by our insurance, could adversely affect our business, financial condition and operating results. As noted below, we are the defendant in litigation claiming that professional wrestling as currently and historically performed by us has resulted in significant injuries to our performers including, but not limited to, chronic traumatic encephalopathy or "CTE". 

We could incur substantial liabilities if litigation is resolved unfavorably.
The Company has been named as a defendant in lawsuits alleging, among other things, that performers received traumatic brain injuries while performing for the Company and may have CTE. One such suit also alleges that the Company misclassified its talent as independent contractors rather than employees. The Company strongly disputes the merit of this type of case and moved to dismiss the lawsuits, which were consolidated for most purposes. Several of the claims have been dismissed, and the Company has moved to dismiss or for summary judgment on all remaining claims. If our current dispositive motions are not granted, or if any dismissals are reversed on appeal (once an appeal can be taken), the Company plans to continue to defend itself vigorously (including, if necessary, opposing class certification in the two cases filed as putative class actions). The Company’s insurance coverage for these cases is unclear. The Company has also been named in a suit that alleges class action status and alleges claims for breach of contract, among other things, relating to WWE’s alleged failure to pay royalties for streaming video on WWE Network. The Company believes all these claims are without merit and intends to continue to defend itself vigorously. In the ordinary course of business we become subject to various other complaints and litigation matters.

By its nature, the outcome of litigation is difficult to assess and quantify, and its continuing defense is costly. Any adverse judgment or settlement could have a material adverse impact on our financial condition or results of operations.

Servicing our debt will require a significant amount of cash, and we could have insufficient cash flow from operations or lack of access to sources of financing to meet these obligations and/or our other liquidity needs.

Our total consolidated debt, including the $200.0 million aggregate principal amount of 3.375% convertible senior notes due 2023 that the Company issued in a private offering in December 2016 (the "Notes"), is significant. In January 2017, pursuant to the exercise of an over-allotment option, an additional $15.0 million aggregate principal amount of the Notes was issued. We also have availability under our $100.0 million revolving credit facility (the "Revolving Credit Facility"). Through certain of our subsidiaries, the Company also has in place a films financing credit facility secured by certain of our films, a term loan secured by the Company’s jet and a real estate mortgage in the principal amount of $23.0 million secured by the related real estate (the “Asset-Backed Facilities”).

We believe we have sufficient liquidity for at least the next twelve months for our needs (including the payment of our dividend). However, our ability to make scheduled principal and interest payments on the Notes and under the Revolving Credit Facility, the Asset-Backed Facilities and any other indebtedness that may be outstanding at the time will depend on our future performance, which is subject to economic, financial, competitive and other factors beyond our control, including the items described elsewhere in these Risk Factors. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and provide for all our other uses of cash including capital and operating expenditures and paying our dividend. If we are unable to generate sufficient cash flow, we could be required to adopt one or more alternatives which, assuming they are, in fact, available, could be onerous, dilutive or otherwise affect our operations and/or the market price of our Common Stock. Such alternatives could include, for example, substantially reducing our cost structure, selling assets, reducing or eliminating our dividend, obtaining additional equity capital and/or refinancing/replacing the indebtedness. We may not be able to engage in any of these activities on desirable terms or at all due to our then existing financial condition, market conditions, regulatory matters or contractual obligations (including, for example, any restrictions under our Revolving Credit Facility or other credit agreement or debt instruments that may exist at that time). Any failure to make a required payment under our indebtedness may constitute a default under that indebtedness and under other indebtedness due to cross-default provisions and could trigger acceleration clauses causing the obligations to become immediately due and payable. The occurrence of one or more of these risks could materially and adversely affect our financial condition and operating results.

Class B Shares
There were 7,725 holders of record of Class A common stock and three holders of record of Class B common stock on February 7, 2017. Vincent K. McMahon, Chairman of the Board of Directors and Chief Executive Officer, controls a substantial majority of the voting power of the issued and outstanding shares of our common stock, and as a result, can effectively exercise control over our affairs.


Monday, February 06, 2017

WWE 2016 Financial Overview

This is a draft of the article that was included in the Cubed Circle Newsletter 2016 Yearbook.
World Wrestling Entertainment revenues grossed $542 million in 2014
and $659 million in 2015.  2016 will be another gargantuan year for
WWE with revenue in excess of $700 million.

WWE’s narrative is simple: escalating TV rights plus explosive WWE
Network revenues equals massive success.

And it’s true that WWE has experienced a windfall of television rights
over the past decade. In 2006, WWE earned about $93 million for their
TV programming. That number grew 2.5x times to $231 million by 2015.

Meanwhile, the real story on the consolidated “Network + Cannibalized”
segments of business is murkier. When you look at this group
(specifically WWE Network, traditional Pay-Per-View, WWE Classics on
Demand, Home Entertainment/Home Video, Digital Media/
PPV) there has not been steady growth. These segments went from
combined $170 million in 2007-2008 but slipped down to about $120
million by 2010-2011.

The WWE Network launched and quickly grew into a major revenue stream
($70 million in 2014, $140 million in 2015, estimated $170 million in
2016). Meanwhile, cannibalized segments have whittled down to less
than $50 million for 2016. Yes, on a net revenue basis, WWE is able to
achieve record net revenues. However, profitability tells a very
different story.

From 2006 to 2010, average OIBDA (operating income before depreciation
& amortization) was $84 million. The high was $94 million in 2010 and
low was $74 million in 2006. From 2011 to 2015, WWE averaged $35
million OIBDA with high of $63 million 2012 and low of negative $15.5
million in 2015. WWE expects 2016 will finish between $80 million and
$84 million. While that would be the highest OIBDA in five years it
will certainly not set a company record. WWE has gone from achieving
double-digit OIBDA as a percentage of net revenues (18% average
between 2006-2010) to single digit (7% average between 2011-2015).
2016 will be an inflection point as this year, WWE hopes to hit about
12% OIBDA %.

This speaks volumes about how WWE has used their lucrative television
contract to subsidize the WWE Network business. It brings in higher
net revenues at a much lower margin. In fact, the OIBDA on the Network
segment (PPV+WWE Network) will probably be lower in 2016 (about $45
million OIBDA) compared to 2015 (which was $49 million OIBDA) despite
almost $31 million more in net revenues generated by the WWE Network.
That’s stunning.

While some of this is related to how much WWE is allocating on WWE
programming for the WWE Network the reality is that in 2016 the WWE
Network is generating just at or slightly below the amount of profit
that the traditional pay-per-view model was generating in the
mid-2000s. That’s on a base of 1.42 million average paid subscriptions
in 2016. With the entire world (save China) able to subscribe to the
WWE Network, how many people are really waiting to pull the trigger on
ordering a wrestling-driven over-the-top subscription service?

So, why does WWE tout their new model over the tried-and-true
pay-per-view delivery system? One important difference between the
traditional PPV model and the modern OTT model is the ability WWE has
to observe the viewing and browsing habits of their WWE Network
customers. In March 2016, WWE announced that Pamela Murrin was joining
the company in a SVP of Data Strategy role as part of Tandy
O’Donoghue’s Strategy and Analytics division. This is an area of the
company that WWE has been quietly beefing up. It’s likely that WWE is
applying their improved data segmentation and audience models to
invest in programming such as the Cruiserweight Classic.

Increasingly, we’re seeing the WWE Network positioned for their
current content and modern material as opposed to marketing their
archival library.  In fact, WWE CFO and Chief Strategy Officer George
Barrios himself recently suggested that people wouldn’t pay ten
dollars a month for the premium content unless they watched the
television shows. Otherwise that would be like “only watching episode
10 of the Walking Dead”. This challenges the notion that WWE really
sees opportunity in the WWE Network as a conduit for their older tape
libraries or that WWE will be expending additional marketing dollars
and effort to recapture lapsed fans beyond the current strategy of
bringing back WCW stars (such as Sting, Goldberg) for nostalgia runs
on the current programming.

It’s important to remember that WWE didn’t need to put all their eggs
in a single basket. Now that they’ve run WrestleMania on domestic WWE
Network (2014), WrestleMania on international WWE Network (2015) and
free WrestleMania (2016) – there’s really no special tricks left in
the hat. WWE acknowledges that growth for 2017 will be at slower rate
than 2016 which demonstrates they understand that it’s getting harder
to attract and retain new subscribers in the increasingly crowded
world of OTT-subscription apps. Meanwhile, WWE continues to position
themselves price-wise against Hulu and Netflix while their programming
is still uniquely niche professional wrestling reality and sports
entertainment shows.

Among the most interesting WWE financial developments of 2016 was the
December 12 announcement that the company would be offering $200
million in convertible senior notes due in 2023 at 3.375% annual
interest. The purpose? A delightfully vague statement about
“supporting the execution of the company’s long-term growth strategy
and for general corporate purposes”. While WWE is certainly not a
professional wrestling monopoly (they would fail either the legal or
economic definition and tests), they are a already financial
juggernaut when it comes to professional wrestling. What do they
intend to do with this all money? Did WWE CFO George Barrios seeking
this financing so he could capitalize on all those appearances at bank
& investors conferences with this credit line of “start-up”-esque
financing (convertible senior notes)? Some have noted that WWE
regularly pays out higher dividends than their free cash flow. Is this
just insurance against the next television rights deal?

Where the company goes from here is difficult to ascertain. While the
brand split has revitalized the relevance of SmackDown, it’s
ultimately insufficient to pull against the waning forces of sliding
television ratings. WWE wants a big television rights deal once their
current bundle of major league deals expire in late 2019, but the
landscape is evolving at such a pace it’s questionable that anyone is
going to bring a big money offer to the table. Instead, we may just
see a series of concessions – change in exclusivity on Raw/Smackdown
rights or reducing number of live hours of content while maintaining
similar TV rights. WWE talks a big game about new international
markets and has done extensive hiring campaigns to find new athletes
in Brazil, India & China, but it’s still questionable whether these
markets will ever deliver the growth that WWE promises or whether
markets like India have also reached the peak of their media bubble.
WWE is certainly doubling down in the United Kingdom marketplace
(interestingly, one of the places they did make a pricing exception
for the over-the-top WWE Network) with the new U.K. tournament and
additional U.K. focused programming. This is a much safer bet than
volatile emerging markets or content-restrictive regimes like China.

Vince McMahon is still emperor of his kingdom. He’s still the Chairman
of the Board, Chief Executive Officer and running the ship when it
comes to creative direction. WWE’s inner circle obviously includes
both Paul and Stephanie Levesque (both sit on the board of directors)
but also key executives like Chief Strategy Officer and CFO George
Barrios (who joined the company in 2008). While we’ve seen McMahon
family members come and go (and come back), it’s a different story
when it comes to top executives.

It was telling that when the WWE President of International Gerrit
Meier quietly left WWE in June 2016. There was a significant
restructuring on international divisions and Meier’s position
(President of International) was eliminated. We’ve seen this before.
For instance, in 2011, WWE removed the COO (Chief Operating Officer)
role after high-level executive Donna Goldsmith left the company.
She’d worked for WWE for a decade and reported directly to Vince
McMahon. Ian Frisch spoke with a former top level WWE executive who
described the experience of working for Vince McMahon as such: “You
are treated like a commodity—just a barrel of corn. You are only a
piece of talent, cultivated and developed, until they need to blame
you and fire you and bring someone else in.”

Financially WWE is stable. They get guarantee rights fess with
built-in quarterly escalators. The WWE Network isn’t likely to break
two million paid subscribers in 2017 (beyond possibly for a single
WrestleMania month), but the subscriber base isn’t likely to collapse
any time soon. They’ve found ways to run more live events annually and
extract higher and higher ticket prices as domestic live events have
grown from $64 million in revenue (2008) to $93 million in revenue
(2015). WWE is set up to have successful 2017 and 2018 years, but
there is still a serious reckoning awaiting in 2019 when it’s time to
pivot and position themselves with new television rights deals.

It’s imperative that WWE finds a way to either effectively monetize
their over-the-top WWE Network through raising prices to achieve a
much higher OIBDA % per subscriber, creating new access tiers (free
with video ads, mobile-only), or striking meaningful partnerships with
other streaming services to provide an OTT bundle. It will be
fascinating to see whether the same inner circle is advising Vince
McMahon in a few years or whether we’ll see another significant
leadership turnover.

Chris Harrington (@mookieghana) writes about professional wrestling
financials and statistics at and

Saturday, February 04, 2017

Mr. Barrios and the Two Hundred Million Dollars

Mr. Barrios and the Two Hundred Million Dollars by @mookieghana
On Monday, December 12, shortly after the New York Stock Exchange closed, World Wrestling Entertainment sent out a press release. WWE was announcing their “intention to offer, subject to market conditions and other factors, $175 million aggregate principal amount of convertible senior notes due [in] 2023 in a private placement to qualified institutional buyers.” This was a staggeringly large transaction. A few hours later, WWE increased the offer and “upsized” the offering to $200 million in convertible notes.

The sales to the initial purchasers was expected to settle by that Friday, December 16, 2016. In the end, WWE expected the “to result in approximately $193.4 million in net proceeds to WWE after deducting the initial purchasers’ discount and estimated offering expenses payable by WWE (assuming no exercise of the initial purchasers’ option).”

Notably, these convertible notes were “unsecured, senior obligations of WWE” with 3.375% annual interest and semi-annually payments starting June 15, 2017. The maturity date for the notes is December 15, 2023 “unless earlier repurchased or converted” whereas WWE could settle “in cash, shares of WWE Class A common stock or a combination thereof, at WWE’s election.”

What is WWE going to do with 193 million dollars? According to the press release, the company was expecting “to use a portion of the net proceeds of the offering of the notes to support the execution of the company’s long-term growth strategy and for general corporate purposes.” That doesn’t tell us much at all.

The decision to use convertible senior notes was unusual and noteworthy.

WWE Chief Financial Officer and Chief Strategy Officer George Barrios joined the WWE in 2008. The hallmark of his tenure has been the series of appearances at various media and banking investor conferences. At first, Mr. Barrios extolled the virtues of WWE’s upcoming domestic television rights renewal. Later, he moved to pitching the future of media with the over-the-top media WWE Network. Each time he presents a similar “investor presentation” with a financial and corporate summary of WWE’s customer-facing strategy.

On January 6, 2017, Mr. Barrios spoke at the 19th Annual Needham Growth Conference in New York City. In addition to Mr. Barrios’ usual investor presentation, he briefly mentioned raising $200 million of convertible debt for purposes “supporting execution of long-term strategy”.

While the company hasn’t released their 2016 results yet, current revenue trends suggests that WWE probably finished the year with north of $700 million in net revenue and around $80 million in profits (adjusted operating income before depreciation and amortisation). UFC had an exceptional year with a sky-high sale price to WME-IMG ($4 billion) on a similar amount of revenue. Significantly, UFC is generating higher profits than WWE in recent years, but also had taken on an enormous amount of debt ($1.8 billion from the WME-IMG sale).

Unlike UFC, WWE has historically had very little debt. In 2015, its debt balance was a paltry $21.6 million was related to the company’s 2013 purchase of a Bombardier Global 5000 aircraft. WWE also had a $200 million unsecured revolving credit facility (that was untapped) and $35 million secured revolving credit facility for the purposes of Film production. Why would WWE suddenly decide to take on $200 million in debt in December 2016?

One reason could be WWE’s cash generated from operating activities versus their free cash flow.

(*) In October 2014, WWE took a $50.0 million advance payment related to their domestic television rights distribution agreement with NBC Universal.

In recent years, WWE has paid $36 million annually in dividends to shareholders. This includes about $20 million paid annually to the four Class B shareholders who are, by design, only Vince, Linda, and their family. The WWE annual report makes clear that the Class B shareholder are limited to “Vincent McMahon, Linda McMahon, any descendant of either of them, any entity which is wholly owned and is controlled by any combination of such persons or any trust, all the beneficiaries of which are any combination of such persons.”

Ideally, a company pays their dividends not just from their cash generated from operating activities, but from their free cash flow (cash generated from operations minus capital expenditures). The challenge is that free cash flow for WWE has only been able to cover the WWE dividends one time in the past five years (2014).

Could the $200 million in convertible debt be part of Barrios’ strategy to fix their pernickety free cash flow issue? Or is it a side effect from attending so many investors conferences? Does the company have a specific acquisition target – a competitor in the over-the-top streaming space (like FloSports) or in professional wrestling (like New Japan Pro Wrestling)? Anything is possible, but so far, WWE hasn’t dropped any meaningful clues.


Need additional information about WWE's Convertible Notes offering?
 Read this terrific primer from @sirmartingale


WWE is looking to raise capital to finance a new growth opportunity(ies).

They can do so through:
(a) issuing new shares of stock
(b) borrowing money to be repaid with interest (issuing debt/bonds/notes)
(c) a combination of both.

Issuing new shares of stock is not preferred because doing so will decrease ("dilute") the value of stock already owned. That is, the same total equity value of the company divided by a larger number of shares outstanding equals a lower price per share.

The company, then wanting to issue notes, looks to do so cheaply (meaning, with as low an interest rate as possible). Because there is an expectation of future growth resulting from the usage of new capital, the company utilizes option (c): the convertible note.

A convertible note allows an investor the choice to receive a predetermined number of shares of stock in place of the debt it is owed from the note (the investor converts the debt into equity). This gives the investor the ability to participate in the potential future growth/upside of the company if the stock price goes "high enough." In exchange for this benefit, the investor is induced to lend its money to WWE at a lower interest rate than if the investor lent the money without the benefit.

As part of this offering to raise capital, WWE did three things:

(1) issued convertible notes to a select group of private investment banks,
(2) executed "convertible note hedge transactions" with affiliates of some of those private investors, (3) executed warrants with the investors.

The convertible notes

WWE issued convertible notes that allows the investor to receive 40 shares (rounding down for simplicity) for every $1000 of debt. This implies a value per share of $25. If the stock price exceeds $25 in the future, then it is "high enough" to convert the bond. For reference, the stock price at the time of this offering was $19.93, so there is a need for the stock to appreciate by over $5 a share to have conversion make sense. That's not a small amount. If the stock never hits that level, the investor will not convert, but is still owed the original $1000 (plus interest) it lent to WWE. On the other hand, if the stock price reaches, say, $30, the investor can convert the notes and receive 40 shares of stock worth $1200 (40 x $30) by only giving up the $1000 it is owed. The investor is, in effect, only paying $25 for something worth $30 - profit for the investor.

A quick aside: When a company is unable to repay its debt obligations under a note issuance, the company defaults. When that happens, the holder of an unconverted convertible note is much more likely to recover some of its losses than if the holder converted the note to shares, since the stock will be worthless, and noteholders have a much higher priority when a company's assets are liquidated to satisfy debts.

The convertible note hedge transactions A drawback for the company is that when an investor converts the debt, the shares given to the investor are newly issued shares of stock. Recall that newly issued shares dilute the value of existing shares. To counteract this effect, WWE entered into what is referred to as "convertible note hedge transactions." This is a fancy way of saying that when an investor chooses to convert the note - that is, "buy" 40 shares of stock at $25 a piece - WWE will choose to purchase the same number of already existing shares at the same price. The conversion increases the number of shares outstanding by 40, and WWE's purchase (similar to a share buyback) reduces the number of shares outstanding by 40. The net effect is that the number of outstanding shares remains unchanged, preventing dilution. These transactions are executed with affiliates of the original investors, and WWE pays these affiliates a fee/premium to have this option.

The warrants
When a company issues convertible notes, it sometimes needs to offer extra inducement to investors in order to receive the desired low and favorable interest rate. This inducement may come in the form of warrants. Warrants, when issued in conjunction with convertible notes, give the investors the option to purchase shares of stock in the event the company significantly exceeds expectations (moreso than the already high expectations associated with the convertible notes). In the case of WWE's offering, this option will be exercised when the stock price exceeds $32 a share (rounding up), which represents a 60% appreciation from the stock price at the time of the offering. So, for example, if the stock price hits $40 a share, the investor will gladly exercise the option to pay $32 for something that is actually worth $8 more. The investors must pay WWE a fee/premium for this option. However, the amount of that fee is dependent upon the estimated probability of WWE's stock price appreciating that much over the next seven years. That probability will be minuscule no matter what sophisticated mathematical model you use, and so too, will be that fee. But that probability is not zero, and in fact, is perceived to be high enough to induce the investors to accept the long-shot bet.

When an investor buys shares of stock under an exercised warrant, it is buying newly issued stock. This again creates dilution, but there is no additional transactions in place to counteract the dilution. WWE may use the money it receives from the share purchases to "buyback" already existing shares to counteract the dilution. Or, it may use that money to fund new growth opportunities.